Fidelity Drops Fund Fees to Zero in Latest Price-War Gambit

By

Teresa Rivas

Aug. 1, 2018 1:37 p.m. ET

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By

Teresa Rivas

Aug. 1, 2018 1:37 p.m. ET

Shares of asset managers, including industry giant BlackRock (BLK), are falling on Wednesday, on news that privately held Fidelity Investments is launching what may be the first no-cost index funds, the same month that Vanguard Group is waiving fees on all ETF trades on its platform.

Where we were: The industry is no stranger to fee wars, which have been steadily pushing down costs for funds over time–as well as asset managers' stock prices.

Where we're headed: Today's news appears to herald a new low—it's hard to get below zero.

Yet the pain increased on Wednesday, with all those stocks trading lower, following news that Fidelity announced new fee structures and is planning to launch two index funds that do not have fees. Both the Fidelity Zero Total Market Index fund and the Fidelity Zero International Index fund will be available to investors on Friday, the mutual fund giant said.

At the moment, other firms including Vanguard offer similar funds with small fees. “Investors will pay a 0.00 percent fee, regardless of how much they invest in either fund, while gaining exposure to nearly the entire global stock market,” reads the press release.

Yet that's not the only area where investors can skip the fee: For August, Vanguard is making all ETF trading free on its brokerage platform, meaning more than 1,800 funds are now available for trade without cost.

BlackRock released this statement on today's news. “As a long standing partner with Fidelity on ETFs, we are pleased that Fidelity has expanded the number of commission-free iShares funds on its platform to 240. Investors and advisors will now have even greater access to iShares ETFs as key building blocks for their investment portfolios. This, and the other actions Fidelity has taken, mean that it will be even easier for investors to access iShares ETFs.”

Of course, the asset-management landscape has long been plagued by fee wars, an issue that Barron's has repeatedly covered—with the danger being that low price tags may entice investors who don't bother to look at fund performance (even if reasonable fees are good goal overall). The industry has been moving toward self-indexing for some time, so it's not as if today's news is a big surprise.

So, having finally reached zero, does this signal the beginning of the end of fee wars (or does the model of negative interest rates beckon)? Never say never, but it does seem like we've hit a bottom: Other asset managers will likely be forced to follow suit and slash their own rates yet again, but zero seems like a hard stop.

Vanguard has, for decades, been at the forefront of the low-fee effort. More recently, though, the race to zero has been led by BlackRock, Schwab, and State Street (STT). In some cases the firms have been punished by the market for cutting fees. If nothing else, it's made publicly traded asset managers quite cheap.

Wells Fargo's Christopher Harris writes that investors are understandably concerned about how other asset managers respond, but it seems a foregone conclusion at this point "It seems probable to us that the cheapest index providers in the industry (Fidelity, Schwab and Vanguard) will ultimately have at least some products with zero expense ratios. We assume this is common knowledge at this point (and the financial impact of a handful of free products is fairly immaterial in any case), so we are a bit surprised at the size of the down moves in many of the stocks across the industry today."

One final thought: The move to low-cost, passive index funds has been a steady shift in recent years, but it's occurred amid a long bull market where investing in the broader market was synonymous with notching gains each year. (For example, just buying and forgetting all three major indexes led to gains around 20% or more in 2017.) If volatility picks up, and if a correction finally comes calling, investors may be rudely reminded that indexes don't march relentlessly forward, and may be willing to pay up for pricier, better-performing products, and even (gasp) active management.

The Financial Select Sector SPDR ETF (XLF) is up 0.1$ to $27.99, but the asset managers were firmly in the red, with Schwab off 1.7%, BlackRock, Franklin, Legg Mason, and Invesco off more than 4%, and Federated falling more than 5%.

We checked in with three money managers about Turkey, the investing opportunities and the red flags.

Fidelity Drops Fund Fees to Zero in Latest Price-War Gambit

Shares of asset managers, including industry giant BlackRock (BLK), are falling on Wednesday, on news that privately held Fidelity Investments is launching what may be the first no-cost index funds, the same month that Vanguard Group is waiving fees on all ETF trades on its platform.

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